How to buy positive....

From: Glenn Mott


After seeing the post by Mark about his properties in Penrith and the abuse hurled his way, I have found 2 properties in metropolitan Perth that would meet most people's criteria for a positively geared property.

Both are in a suburb called Parmelia, 34km from Perth which has 26% of properties rented and 74% owner occupied.

Both are rented for $125 per week and have been for at least 6 months to their tenants.

The median price for properties in Parmelia as of March 2002 was $82,729

The median rent for properties rented in Parmelia as of March 2002 was $113 per week.

Therefore, the median yield is:

113*52/82729*100% = 7.1%

One property is listed for $86,000 and the other listed for $86,500. Therefore the yields for these properties based on their listing prices are:

125*52/86000*100% = 7.5% (rounded)
125*52/86500*100% = 7.5% (rounded)

After speaking with the agent who is selling these properties and quoting the median suburb prices to him, I asked him if there were any distinguishing features about the properties that would validate an asking price $4000 above the median price for the suburb. At this point, imagine several screws being tightened upon the poor guy as I go silent!!. He then advised me that although listed at or around $86,000 he would in fact anticipate a sale price between $80,000 and $82,000. Barrrgain...$6,000 discount already!

Now, lets say that $80,000 is in fact the selling price for both properties and you are the purchaser. Off you then trot to your favourite money lender (mine is ANZ at the moment and my figures will be based on using their finance). You take with you a copy of the Offer and Acceptance form, a copy of the Residential Lease Agreement and a print out of the suburb profile for Parmelia found at http://www.reiwa.com.au showing median house prices and rents and a print out of the cash flow statement that you have prepared for the properties showing rent, expected interest, council and water rates, insurance and management fees.

You can then put it to your lender that as your property is renting for $125 per week and the median yield is 7.1%, your property must be worth $91,549! Because you are putting as little of your own cash possible into the deal, you ask to borrow the following:

80,000 purchase price
1,560 stamp duty (WA)
1,200 provision for rates in advance
400 settlement agents fees
100 searches
-------
83,260

Because you are buying both properties, your total borrowings will be over $150,000. This qualifies you to be an ANZ premium customer so that you get a free VISA card, no bank fees on any account or loan and a .5% discount off the advertised rate for most of their residential property loans. Currently, ANZ have a product that has a honeymoon rate of 5%, meaning the interest you pay in the first 12 months is only 4.5% with no monthly fees!

Therefore, with an interest only loan, your figures would look like this for each property for the first year once purchased:

6,500 rent
-------
6,500 total income

3,746 interest
500 water rates
500 council rates
200 insurance
-------
4,946 total expenses

total income – total expenses = 6,500 – 4,946

year 1 income = +$1,554

Based on current interest rates, at the end of year 1, the interest rate would change to 6.07% (ANZ’s standard variable of 6.57% minus the discount) and the interest amount would change to $5,053. The figures would then look like:

6,500 rent
-------
6,500 total income

5,053 interest
500 water rates
500 council rates
200 insurance
-------
6,253 total expenses

total income – total expenses = 6,500 – 6,253

year 2 and thereafter income = +$247

These properties may never set the world on fire in terms of capital gain, but they offer investors a good entry into the property market at a price that will put money in their pockets.

Pick this to pieces if you will, but this deal is available to anyone with the time and inclination to browse the net and make a few phone calls.

Glenn
 
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Reply: 1
From: Jas


On 6/20/02 6:17:00 PM, Glenn Mott wrote:
>After speaking with the agent
>who is selling these
>properties and quoting the
>median suburb prices to him, I
>asked him if there were any
>distinguishing features about
>the properties that would
>validate an asking price $4000
>above the median price for the
>suburb. At this point, imagine
>several screws being tightened
>upon the poor guy as I go
>silent!!. He then advised me
>that although listed at or
>around $86,000 he would in
>fact anticipate a sale price
>between $80,000 and $82,000.
>Barrrgain...$6,000 discount
>already!

Hate to rain on your parade, but quite often (in fact, all the time) agents will put a listing price higher than the price they want to sell at.

Just their part in the negotiating process.


Jas


----------------------------------
When facing a difficult task, act as though it's impossible to fail. If you're going after moby dick, take the tartar sauce
 
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Reply: 1.1
From: Always Learning


Jacinta,
I think Glenn understands, I think he was just giving a good example of cash-flow+, no money down deal. After all this was just an inquiry phone call.
 
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Reply: 2
From: Nigel W


On 6/20/02 6:17:00 PM, Glenn Mott wrote:
>Both are in a suburb called
>Parmelia, 34km from Perth

That's actually quite a long way out isn't it?

>Now, lets say that $80,000 is
>in fact the selling price for
>both properties and you are
>the purchaser. Off you then
>trot to your favourite money
>lender (mine is ANZ at the
>moment and my figures will be
>based on using their finance).
>You take with you a copy of
>the Offer and Acceptance form,
>a copy of the Residential
>Lease Agreement and a print
>out of the suburb profile for
>Parmelia found at
>http://www.reiwa.com.au
>showing median house prices
>and rents and a print out of
>the cash flow statement that
>you have prepared for the
>properties showing rent,
>expected interest, council and
>water rates, insurance and
>management fees.
>
>You can then put it to your
>lender that as your property
>is renting for $125 per week
>and the median yield is 7.1%,
>your property must be worth
>$91,549! Because you are

I like the way you think Glenn! BUT...if you can get a lender to agree that a residential property is valued on yield and not comparative sales evidence then please give me their number quick smart!!!! The general principle is that the bank will regard your property as being worth the LESSER of the contract price and what the valuer says it's worth based on their guestimation and comparative sales data.

In the bank's defence, this is a fairly reasonable approach - the market value is the price the property just sold for - makes sense really. Of course, this ignores the fact that you may be a fantastic negotiator or just found a desperate vendor etc etc - but that's the way it is. Bank needs to be conservative to make sure that if they have to repo and exercise power of sale that there's enough fat in it to make sure they don't lose $.

Maybe your approach would work in two stages though? that's what I do. I end up getting paid to buy properties and they are CF positive too. of course the key is in property selection and the ability to wear the costs in the transition period.

Cheers
N.
 
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Reply: 2.1
From: Rixter ®


Glen ,
In you research on deciding whether to buy into the suburb what would be the calculated capital growth if someone held it for say the last 10-15 years..Afterall how an area has performed historically will give a very good indication of how it will perform into the future for the same period of time. That is providing no significant area changes have improved it for the better.
Happy Investing,
Rixter :)
 
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Reply: 2.1.1
From: Peter Boyce


Good one Glenn. I checked out the REIA web address that you posted to find information that you quoted on median prices etc and sure enough there it was. My question for the forum is this.

I am also a first time investor I am looking for IP's in Queensland. As part of my due diligence I have been unable to find any internet sites that provide specific historic sales prices without having to pay for them. Can anyone shed some light on this one?

Cheers

Peter
 
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Reply: 2.1.1.1
From: Gail H


Hi Glenn

I'm sorry to be negative too, but I don't think it would be a good way for a new investor to start.

Your figures don't factor in any repairs or vacancy rates. By the time you pay tax on your profits, you could end up pocketing little more than $500 or so a year. Once you add the fact that you may well get no or even negative growth in the areas in question, I just don't think it would be worth it. Just holding the property would limit your ability to hold other more growth oriented properties (banks will only factor in 70% of rent so almost any property will put some sort of dent into your DSR).

Without any prospect for capital growth, how would you fund deposits for future purchases?

I would rather go for cash flow neutral purchases with some prospect for capital growth (head a few k north of Parmelia to coastal suburbs closer to Perth like Warnbro, Waikiki etc. and I think the prospects would be better.)

I also agree that the banks will not finance a house based on yield.

Good on you for stimulating discussion around an actual example. I think we need more of it.

Gail
 
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Sim

Administrator
Reply: 2.1.1.1.1
From: Sim' Hampel


My personal opinion is similar to Gails.

If you want cashflow, then buy cashflow... lots of it. 10% yields aren't enough to give you good cashflow and as Gail said, will simply hurt your ability to buy more properties unless you are really really patient (or lucky with your growth). Aim for 20%.

I mostly aim for properties that are at least cashflow neutral (hopefully positive) in areas which I think will see good long term growth. The aim is not to get money from the cashflow, the aim is for the properties to cost me as close to nothing to hold as possible.

Just my opinion ;-)

sim.gif
 
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Reply: 2.1.1.1.2
From: Tibor Bode


Glenn,

Example is quite good. My 2c.
Firstly, regarding to the yield based value (it is also my dream, but in practice the 10yrs average yield seems to me working well)
is not out of question. It is a Rolf issue although. Who lends money based on valuation?
I am pretty sure there is a lender who is willing to do it. Dolf de Roos uses the same
stuff.
Secondly, I like that depreciation has not been taken into consideration, albeit you'll need it to make it cash flow positive.
Thirdly, If Perth grows, then 34kms from Perth will also grow. Maybe not as fast as the city or inner suburbs, but it will. Maybe some infrastructure development or local council "living village" or other stuff will make it suddenly a desirable area.
Even if none of these happen, it will still grow, due to population increase. So, I would not make a big deal about it. It is interesting reading Jan Somers More Wealth from Residential Property. It talks about this issue in quite details all over, but especially in chapter 9. Worth to read the book for anyone who is serious about IPs.

Tibor
 
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Reply: 2.1.1.1.2.1
From: Joe D


Post is a good practical example, although suitability as IP doesn't excite me too much particularly its distance from the CBD which for Perth is significant. REIWA/DOLA figures also show average annual growths as follows:

30 years (not avail)
20 years 5.7%
10 years 2.1%
1 year 7.1%

Whilst there are always pockets of good performers, a new investor would be hard pressed to gain ground given the 10 year CG figure may not even meet that of CPI (??).

My thoughts only .....

Joe D
 
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Reply: 2.1.1.1.2.1.1
From: Glenn Mott


Hi All,

Thanks for all the replies both positive and negative.

Joe, if you add those figures you quote for capital gain for Parmelia to a rental yield of 7.5% you have a very nice long term return indeed!

Glenn
 
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